=DJ IN THE MONEY:Patriot Scientific Dividend Well Not Endless
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Mon Apr 24 07:33:48 2006 EST
By Maxwell Murphy
A Dow Jones Newswires Column
(This column was originally published Friday.)
NEW YORK (Dow Jones)--Next time you pick up a slang dictionary, don't be
surprised to find the red, white and blue logo of Patriot Scientific Corp.
(PTSC) next to the entry for "one-trick pony."
Patriot Scientific, with a miniscule staff working out of its San Diego
headquarters, collects millions of dollars in licensing fees from big-name
microprocessor companies because they own the rights to key patents for
technologies used by the likes of Intel Corp. (INTC) and Hewlett-Packard Co.
(HPQ). Patriot then doles out the lion's share of this to its numerous
shareholders (who, incidentally, seem to frenetically scramble in and out of
its supremely volatile stock on the over-the-counter Bulletin Board).
For a Bulletin Board stock to pay a dividend is rare, let alone two in one
quarter like Patriot intends, something it's not shy about touting. Later this
month patriot holders will receive a 4-cent dividend for each share they own.
The company paid out 2 cents a share last month. For a roughly $1 stock - one
that's swung between below 1 cent and as high as $2.25 over the past year - a
nearly 6% yield is a real treat.
Right now it has secured license revenue from only a handful of chip makers,
albeit big ones, but some Japanese electronics companies may have to chip in if
one of Patriot's partners wins a lawsuit in a Texas court.
Also, Patriot has "put on notice" more than 150 companies, including
"practically every high-tech consumer electronics manufacturer and systems
integrator in the global marketplace," according to company press releases.
So what's the rub?
Patriot says its 10-patent portfolio includes the "core building blocks" for
hundreds of billions of dollars worth of chips sold over the past decade or so,
especially three key patents it says are "elemental to every microprocessor
design."
But combined, Intel, H-P, Fujitsu Ltd., Advanced Micro Devices Inc. (AMD) and
Casio Computer Co., have only paid about $76 million in one-time-only fees that
grant them licenses in perpetuity. Patriot splits that money down the middle
with its partner, the TPL Group.
Those key patents expire in 2015, leaving a finite timetable for extracting
the portfolio's value. Once it signs all the one-time licenses it can coax the
chip universe into paying, the party's over unless Patriot resurrects any of
the various business ventures of its former life, none of which ever gave it a
whiff of profits over nearly 20 years (before licensing revenues drove it into
the black last year), or it finds new and gifted ponies to ride.
In other words, buying Patriot's stock is a bet that there's several hundred
million dollars more in dividends coming. But there's nothing propping up the
stock once that dividend well runs dry (any new ventures aside), so timing an
exit seems critical.
When Patriot pays the second dividend next week, it'll have shelled out
nearly $25 million to holders in about a month's time, or about 65% of its
share of the licensing take so far. It could probably pay even more, but
keeping cash on hand seems sensible for when those patent expirations forcibly
retire the company from the licensing business.
David Pohl, Patriot's chairman, chief executive and president, wasn't
available for an interview by press time, according to a company spokesman.
Best Case Seems To Leave Little Upside
Assuming, perhaps generously, it can tap nearly all the companies on its
licensing wish list for the average fee it has commanded so far, about $15
million, more than $2 billion could be within reach. But to resolve costly
litigation, last summer Patriot reached an agreement with TPL to unify the
pair's patent portfolio and create one force to pursue licensing fees,
overcoming a major hurdle but with a significant cost to Patriot and its
investors.
Patriot's claim on the patents came from a man named Russell Fish, whose
rights it owns, while TPL's claims came from a deal struck with Fish's partner,
Charles Moore. Under the deal, the groups will split licensing revenue in half,
putting Patriot's maximum take closer to $1 billion.
If our 65% hypothesis pans out, though, that drops the total distributions to
Patriot to $650 million. Remember, that's a best-case scenario.
But there's an "X" factor: Pending litigation traded between Patriot and the
Fish family earlier this month and a dispute with Patriot's former law firm.
Under a 2004 agreement, Patriot was supposed to pay the Fish family as much
as $200 million in royalties from the licensing fees Patriot collects, in
exchange for Fish's help in proving in court any patent claims Patriot files.
If Patriot's share of the licensing revenue were to approach $2 billion, then
Fish would be entitled to the whole $199 million plus $1 million for his family
trust. That much licensing revenue appears unlikely, but Fish was nonetheless
slated to receive between 8% and 11.5% of the proceeds up to that payoff. If
Fish prevails in court, and we deduct what he'd be due from our $650 million
stab, that leaves Patriot only $575 million or so.
Its erstwhile counsel is also suing Patriot, looking for back legal fees and
a cut of the already signed licensing deals. Between this and the sticky Fish
situation, its legal disputes are the No. 1 risk factor Patriot lists in
filings.
Even if Patriot prevails in court in both cases, $575 million's still not
what it seems given the enormous and swelling number of shares the company has
outstanding.
Although it listed 361.8 million shares outstanding as of April 17, figures
Patriot provided for the cost of its 4-cent payout (nearly $16.6 million)
suggest Patriot will pay the dividend on nearly 415 million shares. So Wall
Street has bestowed a market cap on Patriot that's nearly two-thirds of our
rosiest views.
But wait, there's more. Patriot has been retiring dilutive debentures lately
and has made efforts to reduce the number of convertible warrants it has
outstanding. However, there are some disconcerting hints about just how many
more warrants exist. Patriot says in filings that there is a "possibility that
a significant number of shares, the exact number of which we do not know, of
our common stock could be issued on the conversion of the debentures." Though
it can't quantify it, there could be enough new shares issued to an investor
that it results in a change in control of Patriot, it says, so there's clearly
potential for some major dilution down the road.
The potential for as much as $1 or more in dividends on a $1 share sounds
fantastic, but it assuredly won't be if the stock price crashes when the
Patriot pony's lone trick grows stale.
(Maxwell Murphy is one of four "In the Money" columnists who take a
sophisticated look at the value of companies, and their securities, and explore
unique trading strategies.)
-By Maxwell Murphy, Dow Jones Newswires; 201-938-5173;
maxwell.murphy@dowjones.com
(END) Dow Jones Newswires
04-24-06 0732ET
07:32 042406
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